The requirements for occupational pension schemes to have member-nominated trustees (“MNTs”) or, for sole trustee companies, to have member-nominated directors (“MNDs”) have been amended by the Pensions Act 2004 (the “Act”) and the associated Occupational Pension Schemes (Member-Nominated Trustees and Directors) Regulations 2006. This has resulted in drastically reduced ability to opt out, but will also make the process of electing such persons much less prescriptive. The Act therefore requires that, within a reasonable period, arrangements must be in place for at least one-third of the scheme’s trustees or directors to be member-nominated. MNTs are trustees of an occupational trust scheme who are nominated by at least some of the members of the scheme. Member-nominated directors are similarly nominated as directors of a company acting as sole corporate trustee of a scheme. This Commentary discusses MNTs, but unless otherwise indicated, all references apply equally to membernominated directors.
Under previous legislation (the Pensions Act 1995), a scheme could opt out of MNT requirements by proposing “alternative arrangements”. Under the Act this is no longer possible and, instead, the Act disapplies its provisions only in the specific cases prescribed by the Regulations. An opt-out may now be used only where a scheme:
• has fewer than two members; or
• has fewer than twelve members, where all members are trustees, and where the scheme rules provide that trustee decisions must be unanimous; or
• is a scheme whose members need not be employed by the same employer, where at least two employers are not associated or connected, and where the scheme rules do not provide that trustees or directors may be appointed or removed by one employer solely; or
• is a direct-payment, paid-up insurance scheme; or
• is a scheme where the sole trustee, director, or all the trustees or directors are independent such that they have no interests in the assets of the employer nor any connection with the employer.
Elect ing MNTs
The Act has also changed many other rules, not related to the opt-out, that previously applied. The high level of detail on the procedure for election of MNTs under the previous legislation has been removed in favour of more generalised and flexible provisions based on principles. For example, arrangements must be put in place within a reasonable period rather than a specified time limit, and where no nominee stands for election, the nomination and selection process is to be repeated at reasonable intervals until the vacancy is filled.
The process of selecting MNTs has also been altered by the Act, and it is now necessary for all active and pensioner members to be eligible to participate in the nomination of candidates (as opposed to merely approving the arrangements for nomination), and for some or all of the members to be involved in the selection. This does allow a representative group to act as selectors rather than all members if preferred. In a resource-saving provision, the Act also provides that where the number of nominations for MNTs received is either less than or equal to the number of appointments required, then those nominees are automatically deemed to have been selected.
Other Pro vision s
With regard to the technicalities of MNTs, the new Act no longer includes requirements as to the length of terms to be served by MNTs, and at the same time no longer specifies a minimum number of MNTs. Instead, it only requires that the number of MNTs must constitute at least one-third of the total number of trustees, though the number can be greater than one-third where the employer so agrees.
The Act also contains provisions relating to the termination of an MNT’s service. It is no longer the case that MNTs must be eligible for re-selection at the end of their period of service, and there is no continuation of the previous requirement that once an MNT ceases to be a member of the scheme, he also ceases to be a trustee, for now the employer may approve his continuance in his role.
Com ing Into Effect an d Tran sitiona l Pro vision s
The provisions came into effect on 6 April 2006 for new schemes, but they also contain transitional provisions for schemes that took advantage of the opt-out in the previous legislation, for which the new provisions must be in place by 31 October 2007, or, if earlier, when the time period for the alternative arrangements runs out.
The Regulator ’s Guidance
The Pensions Regulator has issued a code of practice (Regulatory Code of Practice Number 8) in relation to the new MNT provisions. Whereas these guidelines do not have the same power as legislation, they are a good guidance of the Regulator’s own position, which, as the Regulator has the power to issue fines for non-compliance with the legislation relating to MNTs, is indicative of an appropriate approach. The code of practice covers both timescales and general principles for implementing the provisions.
The Regulator has indicated that from a requirement arising to put in place member-nominated trustees for the first time or on a vacancy arising, a reasonable period would be six months. This would mean that within six months of a vacancy arising or a scheme being established, the member-nominated trustees should be elected and in place. If an election nomination procedure resulted in there being insufficient member-nominated trustees (usually because of insufficient nominations), the reasonable period after which the procedure should be carried out again should not be any longer than three years, according to the code of practice
The Regulator suggests that as the legislation has become less prescriptive, it would expect that the process should be carried out in accordance with principles. These principles are:
• Proportionality – The provision of the process should be proportionate to the end achieved, meaning that if a better process would be significantly more expensive or difficult at very little improvement to the process, it would not be necessary to improve the process. Conversely, if a small and inexpensive change would have a significant effect on the process, covering, for instance, significantly more members, then that amendment should be implemented.
• Fairness – The code proposes that the nomination and selection procedures should be fair to all members, which does not require all members to be treated exactly the same but that all members concerned should be considered.
• Transparency – The Regulator puts a high value on communication, and the code of practice suggests that full communication to all members as to the process that has gone through is an important part of ensuring that the selection procedure is appropriate.
Furt her Act ion
If your occupational pension scheme presently operates an opt-out, you should seek advice as to when this runs out. If you presently have MNTs, these should remain in place until their term of office ends. Thereafter, you should seek advice as to how to implement the new provisions in keeping with your business’s objectives.